Greater Uncertainty Threatens Expansion
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1 /GE /
August 17, 2011
Greater Uncertainty Threatens Expansion
U.S. Economic Assessment &Interest Rate Outlook
August 18, 2011
GE Capital, AmericasRobert Podorefsky (617) 973-4091
2 /GE /
August 17, 2011
U.S. economy weakens �…Amid uncertainty and more policy risk
Extraordinary factors contributed �• Inflation hurt demand, shortages from Japan impacted manufacturing, Q1 weather disrupted comps while unemployment and Washington�’s messy budget handling weakened confidence
Key downside risk - financial market developments�• Market volatility �– raises business & consumer anxiety�• Unfavorable fiscal/geopolitical considerations �– Europe, Mid-East
Key to maintaining expansion�• Continued government backstop ideology, contained oil prices
Key challenges�• Housing sector and employment situation remain weak�• Federal budget �‘super committee�’ must find solutions to deficit
3 /GE /
August 17, 2011
Watch the negative equity drivers �…Monthly Change in S&P 500 Equity Index
-125
-100
-75
-50
-25
0
25
50
75
100
AprM
ayJunJulAugSepO
ctN
ovD
ecJan '10FebM
arAprM
ayJunJulAugSepO
ctN
ovD
ecJan '11FebM
arAprM
ayJunJulAug so far
Data source: Bloomberg and Federal Reserve
Australiabegan to tighten
Chinabegan to tighten
Fiscal & economic worries
U.S. household wealth fell $1.3 tn in Q2 '10, then up $4.0 tn thru Q1 '11
Up 30% thru Apr 30 after Bernanke outlined "options for further easing" on Aug 27, '10
4 /GE /
August 17, 2011
Parallel crises dominate while impact varies �…Total Marketable Sovereign Debt
in trillions of U.S. dollars
$0.13 $0.20 $0.42$0.92
$2.28
$9.34
0
2
4
6
8
10
Ireland Portugal Greece Spain Italy UnitedStates
Data source: Bloomberg
% of total that comes due through 2013Ireland = 18%
Portugal = 32%Greece = 33%Spain = 41%Italy = 36%
United States = 46%
5 /GE /
August 17, 2011
Messy deficit debate dispirits the nation �…U.S. Federal Budget Gap
0.0
0.6
1.1
1.7
2.2
2.8
3.3
3.9
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
Data source: U.S. Treasury
Gov't Spending in $Tn'sGov't Revenues in $Tn's
Fiscal year 2010Outlays = $3.45 tnRevenues = $2.16 tnDeficit = $1.29 tn
White House estimate 2011Outlays = $3.82 tnRevenues = $2.17 tn
6 /GE /
August 17, 2011
U.S. rate structure benefits significantly �…U.S. Treasury Yields Compared
3.67%
2.22%
0.93%
0.18%0.01%
4.33%
3.29%
2.01%
0.59%0.12%
0.0%
1.5%
3.0%
4.5%
3-month 2-year 5-year 10-year 30-yearData source: Bloomberg
Aug 16, 2011 Dec 31, 2010
7 /GE /
August 17, 2011
Public debt surged, will keep rising yet rates fell �…
1.1
3.2
5.2
7.3
9.4
Aug-98
Nov-01
Feb-05
May-08
Aug-11
Data sources: U.S. Treasuryand Bloomberg
0.5%
1.5%
2.5%
3.5%
4.5%
5.5%
6.5%
Marketable Treasury Debt Outstanding - $'s Tn's (left axis)5-yr U.S. Treasury yield (right axis)
Fed tightened
Since Q4 '07The debt's more than doubled
Fed tightened
8 /GE /
August 17, 2011
In �’10, less inflation eased transition to lower rates �…
Data source: Bureau of Labor Statistics
-2.1%
-0.6%
1.0%
2.5%
4.0%
5.6%
Aug-08
Oct-08
Dec-08
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
0.6%
1.2%
1.9%
2.5%
Headline U.S. CPI yoy (left axis)Core U.S. CPI yoy (right axis)
(June '11)Headline: 3.6% yoy
Core: 1.6% yoy - highest since Jan '10
9 /GE /
August 17, 2011
In �’11, a complex path to lower rate expectations �…
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Data source: Bloomberg
Expectation for 3m Libor - June 20133m U.S. Libor
Aug 9: FOMC says conditions warrant an exceptionally low fed
funds rate through mid -2013
Jul 29: Q2 U.S. GDP disappoints
Jul 8: June U.S. employment data
disappoints
Apr: Europe's debt crisis worsens May & June: Weaker U.S. economic data July: U.S. budget impasse
Apr 18: S&P lowered its long-term U.S. ratings outlook to negative
Mar 11: Tsunami
devastates Japan May 2:
Oil falls after bin Laden's
death
10 /GE /
August 17, 2011
Disinflation ends. Commodity surge hits a wall �…CRB Commodty Price Index
flat y-t-d- in 2011 as of Aug 17up 17% in 2010up 23% in 2009
down 36% in 2008
180
259
338
417
Aug-08
Mar-09
Oct-09
May-10
Dec-10
Aug-11
Data source: Bloomberg
End May '10 - end Apr '11, + 45%
Live cattle: + 29% - 1%Crude oil: + 54% - 23%Wheat: + 68% - 5%Corn: + 110% - 5%Cotton: + 123% - 39%
Since Apr '11
CRB - 10%
11 /GE /
August 17, 2011
Watch gasoline, price direction reflects outlook �…
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
Apr-11
Aug-11
Data source: Nymex and DOE
1.60
2.10
2.60
3.10
3.60
4.10
Avg U.S. retail gasoline price per gallon (right axis)Wholesale gasoline - Nymex price (left axis)
12 /GE /
August 17, 2011
Extraordinary stimulus remains key policy stance �…
FOMC Statement �– August 9th
�• Inflation: �“Recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable�”
�• Economic conditions: �“Somewhat slower pace of recovery�” is expected over coming quarters compared to previous (June) estimates. �“Downside risks to the economic outlook have increased�”
�• Policy: Economic conditions are likely to warrant an �“exceptionally low�” fed funds rate �“at least through mid-2013�”
13 /GE /
August 17, 2011
Expectations for Libor fall dramatically �…Expectation for 3m U.S. Liborimplied yield per futures market
3.61%3.18%
2.53%
1.70%
0.85%0.49%0.46%
0.61%
1.95%
4.92%5.17%
4.50%3.85%
3.00%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Sep '11
Dec '11
Mar '12
Jun '12S
ep '12D
ec '12M
ar '13Jun '13S
ep '13D
ec '13M
ar '14Jun '14S
ep '14D
ec '14M
ar '15Jun '15S
ep '15D
ec '15M
ar '16Jun '16S
ep '16D
ec '16M
ar '17Jun '17S
ep '17D
ec '17
17-Aug-11 31-Mar-11with December implied yields
31-Dec-10
Data source: Bloomberg
with December implied yields
14 /GE /
August 17, 2011
Pass-through inflation pressures muted overall �…
-8.0%
-5.0%
-2.0%
1.0%
4.0%
7.0%
10.0%
Jun-91
Jun-95
Jun-99
Jun-03
Jun-07
Jun-11
Data source: Bureau ofLaborStatistics
Consumer Price Index (yoy)Producer Price Index (yoy)
15 /GE /
August 17, 2011
Easing in gov�’t interest expense won�’t last �…
5
7
9
11
13
15
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011 (*)
Data source: U.S. Treasury
300
340
380
420
460
U.S. Public Debt ($ Tn's) - left axisInterest Expense ($ Bn's) - right axis
Fiscal 2007 - 2010Public debt: + 51%
Annual interest expense: - 4%
(*) Fiscal 2011: (based on Oct '10 - July '11 actual data plus estimate)
16 /GE /
August 17, 2011
But interest burden is still very manageable �…U.S. Gov't Interest Expense as a Percent of Nominal GDP
Fiscal Year (Sept) Comparison
2.5%
3.1%
3.6%
4.2%
4.7%
1989
1990
19911992
1993
19941995
1996
19971998
1999
20002001
20022003
2004
20052006
2007
20082009
2010
2011 (*)
Data sources: U.S. Treasury and Bureau of Economic Analysis
(*) 2011 Estimate - End Sept '11:Nominal GDP = $15.083 Tn
Interest expense = $462.5 Bn
17 /GE /
August 17, 2011
Fortunately, foreign demand for Treasurys holds up �…Foreign Holdings of U.S. Treasurys
in trillions of dollars
0.92
1.64
2.36
3.08
3.80
4.52
Oct-01
Oct-03
Aug-05
Aug-07
Jul-09
Jun-11
Data source: U.S. Treasury
Up 11% yoy Jun (*)vsUp 20% in '10vs Up 20% in '09
Top 2 Foreign Holders as of June '11 1. China @ $1,166 bn, + 5% yoy - was + 71% yoy in Jul '09 2. Japan @ $911 bn, + 14% yoy - was + 22% yoy in Dec '09
18 /GE /
August 17, 2011
Economic composition �– U.S. GDP �…
Data source: BEA
Personal consumption, 70.7% vs 70%
Q4 '07
Private investment,
13.4% vs 15.9% Q4 '07
Net exports, -3.1% vs -4.2%
Q4 '07
Gov't spending,
18.9% vs 18.4% Q4 '07
Q2 2011 U.S. Real GDP Breakout
19 /GE /
August 17, 2011
Consumption trend has stalled �…U.S. Real Personal Consumption Expenditures
-2.7%
-1.7%
-0.7%
0.3%
1.3%
2.3%
3.3%
4.3%
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Data source: Bureau of Economic Analysis
yoy change3-month change - annualized
20 /GE /
August 17, 2011
Amid unimpressive payroll gains �…
in 000's
-850
-632
-413
-195
23
242
460
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Data source: Bureau of Labor Statistics
Monthly Change in Private PayrollsMonthly Change in Nonfarm Payrolls
Private: + 1.8mnHeadline: + 1.3mn
Past 12 months
21 /GE /
August 17, 2011
While income improved, inflation saps wages �…
-9.0%
-7.0%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Data source: Bureau of Economic Analysis
U.S. Personal Income (yoy)Real Personal Income Less Transfer Payments (yoy)Real Wages (yoy)
22 /GE /
August 17, 2011
Watch import prices from China �…U.S. Import Prices from China
y-o-y change
-4%
-2%
0%
2%
4%
6%
Aug-05
Feb-07
Aug-08
Jan-10
Jul-11
Data source: Bureau of Labor Statistics
July '11+3.5% yoy
Through early '07, the U.S. imported
deflation from China
23 /GE /
August 17, 2011
Consumers take on some more borrowing �…
-20
-10
0
10
20
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Data source: Federal Reserve
U.S. Consumer Credit, Ex-Real Estate ($ Bn's)3-Month Average
Monthly ChangeLargest increase
in 4 years
24 /GE /
August 17, 2011
Investment growth trend is moderating �…Change in Real Private Business Investment
-42%
-32%
-22%
-12%
-2%
8%
18%
Jun-01
Jun-03
Jun-05
Jun-07
Jun-09
Jun-11
Data source: Bureau of Economic Analysis
Quarterly outcome - annualizedHalf year outcome - annualized
25 /GE /
August 17, 2011
Key �‘services�’ sector gauge signals modest growth �…
36
42
48
54
60
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Data source: Bloomberg
30
36
43
49
56
ISM non-manufacturing index (left axis)Non-manufact employment sub-index (right axis)
above 50 (left axis index) signals service sector expansion
26 /GE /
August 17, 2011
While manufacturing sector expansion slows �…
32
40
47
55
62
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Data source: Bloomberg
16
41
67
92
ISM manufacturing index (left axis)Prices paid for purchases (right axis)
above 50 signals expansion
July 50.9
27 /GE /
August 17, 2011
Amid auto production adjustment �…
67%
73%
79%
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Data source: Federal Reserve
30%
49%
68%
US Capacity Utilization - left axisCap U for Motor Vehicles - right axis
28 /GE /
August 17, 2011
Overall business inventory backdrop is favorable �…U.S. Inventory-to-Sales Ratio
number of months
1.20
1.33
1.46
1.59
1.72
May-82
Aug-89
Nov-96
Feb-04
Jun-11
Data source: U.S. Commerce Dept
Q1 '09
= Worst of U.S. recession Q1 '11
29 /GE /
August 17, 2011
As is backdrop for private credit expansion �…Commercial and Industrial Loans
at U.S. Commercial Banksin trillions of dollars
0.5
0.7
0.9
1.1
1.3
1.5
1.7
Dec-90
Jan-95
Mar-99
Apr-03
Jun-07
Aug-11
Data source: Federal Reserve
- Oct '08 peak: $1.62 tn- Most recent: $1.28 tn Decrease: $340 bn
Fed tightening cycle began
Fed tightening cycle began
Since post crisis
low in Sep '10,
up $70 bn
30 /GE /
August 17, 2011
Still dealing with residential mortgage burden �…U.S. Residential Mortgages Outstanding
in trillions of dollars
0.0
2.7
5.3
8.0
10.7
Mar-80
Dec-87
Sep-95
Jun-03
Mar-11
Data source:Federal Reserve
Q4 '98
Q3 '01
6.0 tn
8.0 tn
10.0 tn
Peak: 10.6 tn Q1 '08
31 /GE /
August 17, 2011
And too many homes �…Ratio of U.S. Existing Housing Units to Number of U.S.
Households
1.070
1.075
1.080
1.085
1.090
1.095
1.100
1.105
1.110
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010 (*)
2011 (*)
Data source: U.S. Census Bureau. Estimates based on Census Bureau and nielsenw ire (*) 2010 & 2011 estimated
32 /GE /
August 17, 2011
Causing home prices to fall �…U.S. Home Prices are 3% Below the 5-Year Average
and 20% Below July '06 PeakSingle Family Home Prices in $000's
0
77
154
231
Jul-69
Jan-80
Jul-90
Dec-00
Jun-11
Data source: Nat'l Association of Realtors
Median Home Prices5 year moving average
- Past 30 years, prices averaged 8% above the 5-year average
- In June 2005, prices exceeded the 5-year average by 33%
33 /GE /
August 17, 2011
In all, some moderate growth still expected �…
2.5%2.2%
2.5%
1.3%in Q2
2.1%
-9.0%
-5.8%
-2.5%
0.8%
4.0%
Q3 '08
Q4 '08
Q1 '09
Q2 '09
Q3 '09
Q4 '09
Q1 '10
Q2 '10
Q3 '10
Q4 '10
Q1 '11
Q2 '11
Q3 '11 *
Q4 '11 *
Q1 '12 *
Q2 '12 *
Data source: Bureau of Economic Analysis
U.S. Real GDP1 year average
(*) Bloomberg consensus forecasts
(Aug 12 survey)
34 /GE /
August 17, 2011
In summary
Near-term - 2011 & 2012
�• Policymakers focus on boosting near-term dynamics
�• U.S. real GDP subject to energy and equity prices
�• Equities vulnerable to extraordinary uncertainties
�• Fed�’s key focus is jobs - watch employment data
Beyond the moment
�• Budget deficit will force tough decisions on spending and taxes
�• Deeper fiscal erosion has risky inflation consequences
�• Less stimulus does not have to derail growth
35 /GE /
August 17, 2011
Appendix
Answers to some recently asked questions
36 /GE /
August 17, 2011
Magnitude of U.S. fiscal deterioration post crisis �…
Fiscal '10 Fiscal '08 PeakKey budget receipts:Individual Income Tax * $ 899 bn $ 1,146 bn $ 1,163 bn '07Corporate Income Tax $ 191 bn $ 304 bn $ 370 bn '07
Key budget outlays:Defense-Military $ 667 bn $ 595 bn Fiscal '10Health & Human Services $ 854 bn $ 701 bn Fiscal '10Interest on Treas Debt $ 414 bn $ 451 bn $ 451 bn '08Dept of Labor $ 173 bn $ 59 bn Fiscal '10
Social Security $ 754 bn $ 658 bn Fiscal '10
Data source: www.fms.treas.gov
37 /GE /
August 17, 2011
How fiscal 2011 is shaping up for the US �…
First 10 months of Fiscal �’10 & �’11 compared �– through July
Total receipts (*):
Total outlays:
Deficit:
Fiscal 2011
$1.893 Tn
$2.993 Tn
$1.100 Tn
$0.891 Tn
$0.141 Tn
Fiscal 2010
$1.753 Tn
$2.922 Tn
$1.169 Tn
$0.719 Tn
$0.140 Tn
(*) includes:Indiv. income tax receipts:
Corp. income tax receipts:Data source: www.fms.treas.gov
Individual income tax receipts up, corporate tax receipts near flat and total outlays higher
38 /GE /
August 17, 2011
Average maturities for Treasury debt are rising �…
Average Maturity of Total Outstanding Marketable U.S. Treasury Debt - in months
past 10 years
48
56
64
72
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Data source: U.S. Treasury
Recent ComparisonJun '08: 56 monthsJun '09: 51 monthsJun '10: 58 monthsJun '11: 62 months
39 /GE /
August 17, 2011
FOMC�’s views on a normalization policy �…
1st step �– FOMC would likely first cease reinvesting some or all payments of maturing principal on its securities holdings
2nd step �– At the same time or thereafter, the FOMC will modify its forward guidance on the path of the federal funds rate and will initiate temporary reserve-draining operations.
3rd step �– When economic conditions warrant, the FOMC will begin raising its target fed funds rate, and from that point on, changing the target rate will be the primary means of adjusting monetary policy. During the normalization process, adjustments to interest rates on excess reserves and to the level of reserves will be used
4th step �– Sales of agency securities from the Fed�’s balance sheet will likely begin sometime after the 1st fed funds rate increase
Per Minutes of the June 21-22 FOMC Meeting
40 /GE /
August 17, 2011
After QE2, no buying & run-off would look like this �…Fed's Balance Sheet - U.S. Treasury Holdings (*)
0
30
60
90
120
150
180
mid-2011
2011
2012
2013
2014
2015
2016
2017
2018Data source: Federal Reserve& N.Y.Fed
-.15
.05
.25
.45
.65
.85
1.05
1.25
1.45
1.65
Maturing Treasury Debt ($ Bn's) - left axisPotential Treasury Balance ($ Tn's) - right axis$'s Bn $'s Tn
Fed's Treasury balance Now: $1.63 Tn
With run-off & no adds End 2018: $460 Bn
(*) Includes Bills, Notes, Bonds and TIPS
41 /GE /
August 17, 2011
State & local government tax receipts edge higher �…State & Local Tax Revenues
$1.02
$1.07
$1.12
$1.17
$1.22
$1.27
$1.32
Sep-06
Jun-07
Mar-08
Dec-08
Sep-09
Jun-10
Mar-11
Data source: U.S. Census Bureau
$235
$250
$265
$280
$295
$310
Total: 4-qtr avg, annualized in Tn's (left axis)Individual income tax: 4-qtr avg, annualized in Bn's (right axis)
42 /GE /
August 17, 2011
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